The fight for Cara's soul

The Canadian sailboat Defiant charged to victory last week, pounding across the rough waters of Lake Ontario to vanquish its U.S. challenger in the Canada's Cup race. It was a crowning moment for the Canadian side in a 107-year-old yachting rivalry -- but also a time of triumph for a shy, rumpled, slightly overweight man waiting on the shore.

Paul David Phelan, scion of a Canadian fast-food fortune, was a key financial partner in support of the Defiant and its talented skipper, his cousin Terry McLaughlin .

The victory also cleared the deck for Mr. Phelan to pursue his other act of defiance -- challenging a privatization bid for the family food service company, Cara Operations Ltd., by his two sisters and his niece.

Story continues below advertisement

"It's unfortunate that there's a war on," says Mr. Phelan, whose recent accumulation of Cara shares escalates a long-running struggle with his siblings over the memory and legacy of his late father, Cara's builder, Paul James Phelan, a charismatic, hard-drinking yachtsman known as P.J.

Boats, booze and business have been a volatile, and often poisonous, mix for Toronto's wealthy Phelan family, which has controlled Cara for more than 120 years -- since Paul David's great-grandfather co-founded the company to sell newspapers and apples on the Grand Trunk Railway.

Cara, originally known as Canada Railway News Co., is now a food service giant with $1.1-billion in annual sales and the owner of such restaurant brands as Harvey's, Second Cup, Swiss Chalet, Kelsey's and Montana's -- as well as the nervous in-flight caterer to financially hobbled Air Canada.

Paul David Phelan, 52, an investor and Harvey's franchisee, has been buying shares, taking his stake to 18.4 per cent of Cara's non-voting stock -- not enough to squelch his siblings and his niece, but enough to be a player when combined with other shareholders.

If he has regrets, it is not with "the war" against his family members. The takeover battle may keep him away from his beloved Finn racing -- single-handed sailing aboard an Olympic-class dinghy.

In August, Paul's sisters, Gail Regan and Rosemary Phelan, and his niece Holiday Phelan-Johnson, who control 79 per cent of Cara's voting shares, said they wanted to take the company private.

Story continues below advertisement

Story continues below advertisement

They announced they would pay $7.50 a share in a $324-millon cash bid for voting and non-voting shares they do not already own.

The offer, expected to be put before both classes of shareholders next month, has rekindled a sibling feud that is one of the most prominent examples of family business dysfunction in Canada.

The Cara story is documented as a case study in succession horrors by Gail Regan, Paul's PhD-educated sister and Cara vice-chair. Ms. Regan, 59, has made a film that details her father's alcoholism, dementia and his chronic inability to grapple with succession, which for years denied her the leadership role she felt she had earned.

In the documentary, Proud Waves Break, Ms. Regan paints the image of Cara as a place of dark secrets and denial, and her father as a modern Job, imprisoned by the bottle and beset by a multitude of ills.

But others saw the aging P.J. Phelan, who died a year ago at 84, as a corporate King Lear, surrounded by feuding children, and wandering about in mental disarray.

The current battle is typically and tragically Phelanesque. Both sides accuse the other of stretching the truth, particularly regarding the care and treatment of their father during the period around 1995 when his health collapsed and the sibling feuding rose to fever pitch.

Story continues below advertisement

Now the three women are questioning the motivation of Paul David, who five years ago sold his one-third share of the family's voting interests to them, but has since been buying non-voting shares -- including a large block shortly after their bid was announced.

Mr. Phelan has cloaked himself in the cause of minority shareholders, arguing that the price offered is opportunistic and inadequate, given the firm's long-term prospects. It just has to get past the recent impact of SARS on restaurant and air traffic, and the uncertainty surrounding Air Canada, he says.

Meanwhile, his sisters and niece argue that since Cara went public in 1968, the stock market has consistently failed to assign full value to its shares, and now they are giving minority holders a way to exit at a good price.

The women say going private would allow the owners and managers to guide the company in a way sensitive to employees and consumers, without being captive to the grow-at-any-cost mentality of the markets.

Paul David admits his motivations reflect both hard-headed financial considerations and family pride. After selling his Cara shares and taking a flyer on technology in the late nineties, he had returned to long-term value investment, and in a company whose operations he knows so well.

"I'm going to try to block the transaction so I can continue to own the shares," Mr. Phelan said at one point. But late last week, he said his major priority was to extract a higher price from his family members and their holding company, Cara Holdings Ltd.

Story continues below advertisement

He doesn't hide his enmity toward sister Gail, and his opposition to her leadership role at Cara. He says he worries what would happen if she had total control of a private company.

Rosemary Phelan, who like her sister is estranged from their brother, says Paul's share buying reflects "an emotional involvement with the company." But Ms. Phelan, 48, alleges that her brother also resents that three women now run the family business.

Mr. Phelan points out that besides backing Defiant, he is also working closely with the Canadian Europe Team, a female single-handed Olympic-class sailing team, thus demonstrating an ability to work collegially with women.

Rosemary Phelan says she, her sister and her niece work well together, taking a distinctly female approach to reaching decisions by consensus, although Ms. Regan is the clear leader.

Holiday Phelan-Johnson, 33, inherited her role in the ownership group as the only child of Gail and Rosemary's late sister Sharon, who died in 1994 at age 47. She says her uncle -- with whom she maintains indirect contact -- chose to sell his voting stake in Cara but "maybe he sometimes wishes he hadn't done so. He has chosen to become a significant shareholder and he doesn't want to see that taken away."

Ms. Phelan-Johnson can afford a certain detachment. Based in Sausalito, Calif., she is an environmental filmmaker whose best-known work is The Last Stand, a documentary about the 15-year struggle between environmentalists and the timber industry over the fate of the ancient redwoods in Northern California.

Story continues below advertisement

She was named after the blues singer Billie Holiday by her father, who died when she was small. In Cara, she has pushed for sound environmental practices, such as urging Second Cup to buy a higher-grade coffee grown by small collectives, and to reject rain forest beef as a source of Harvey's burgers.

Ms. Phelan-Johnson was drawn toward Cara by her memory of her grandfather P.J., who became a father figure after her own father died so young. She learned to sail with P.J., and during her recent pregnancy with her first child, took a sailing trip with her husband to the South Pacific. She named her baby daughter Mia, which was the name of P.J.'s Dragon sailboat.

Paul David Phelan has himself grappled with family tragedy -- the death of a daughter, one of his five children, from leukemia in the 1980s.

A shy but prickly personality, he says he was once told by a colleague that he had "a talent for invective." Yet he speaks with the air of someone awakened from a deep sleep. Often dismissed as a spoiled rich kid -- he admits he dabbled with drugs as a younger man -- he is also described as deceptively shrewd by people who know him.

These days, he is stepping out from the long shadow of his family -- both as an investor and sailboat backer, taking up the cause of the controversial Defiant, whose sponsorship by power transmission giant Hydro One was among the alleged excesses perpetrated under ex-CEO Eleanor Clitheroe.

But he insists that he prefers to work behind the scenes, letting the "hotshots" take centre stage; his father, on the other hand, relished the recognition that went with using money and influence.

Story continues below advertisement

Mr. Phelan has hired Crosbie & Co., an investment banking firm, to advise him on his investment alternatives, and the Crosbie people have talked to other dissatisfied investors. The bid has to be approved by the majority of the minority shareholders in each share class. (His sisters and niece control 29 per cent of the non-voting shares, in addition to 79 per cent of the voting common shares.)

Mr. Phelan has contacted investment manager Jarislowsky Fraser Ltd., which owns 16 per cent of the voting shares and would seem capable of killing the deal -- or at least play a big role in any pressure to lift the price. The investment firm is not commenting until it sees the offering circular, expected soon.

Paul David says he might sell to a higher bid, but it's about more than dollars and cents. "I'm still a franchisee, I have a great interest in the company, it's my heritage. But it's not just my situation -- it's my children and they want to stay in."

The rambling brick and stone mansion at 8 Old Forest Hill Road sits empty now, its large rooms cold and unwelcoming -- a far cry from the days when an ebullient P.J. Phelan would warmly greet guests for a night of fine food and libations.

The only sign of drinking is an empty beer bottle left on the rear patio, which overlooks the idle tennis court where P.J. used to pitch a tent and hold sit-down dinners for hundreds of his yachting pals.

This once vibrant house, still tied up in the estate of P.J.'s late wife Helen Gardiner Phelan, is not habitable because of an oil leak in the basement. Its vacancy symbolizes the passing of an age of dominance by Toronto "old money" -- and the dysfunction of a once golden family.

This is where P.J and Helen Phelan carried on one of the most dynamic marital partnerships in Canadian business, a savoury blending of fast-food dynasties. Eight Old Forest Hill was a house fuelled by the grease of grilled burgers and fried chicken.

Helen was the daughter of Percy Gardiner, who once owned a chunk of hockey's Toronto Maple Leafs and sold his shares in Maple Leaf Gardens to an ambitious tycoon named Conn Smythe, allowing him to retain control of the arena.

Her brother was George Gardiner, the stockbroker and entrepreneur who brought to Canada the lucrative Kentucky Fried Chicken franchise, a rival to the Phelans' Swiss Chalet -- and became the benefactor of a ceramics museum.

The George Gardiner family lived next door to the Phelans, which turned that section of lush Forest Hill into a cauldron of fast-food competition. Helen kept her hand in the Gardiner business, cooking up ideas with George, while P.J. masterminded Cara.

On early Saturday mornings at the Phelan house, the children were treated to a hectic scene in their parents' bedroom: Helen on one side of the bed advising brother George by telephone on where to put the next KFC outlet. On the other side, P.J. Phelan was making calls on where to plop the next Swiss Chalet.

Sometimes, they ended up on the same intersection, but what the hell, it was the growth era for fast food, as the car took hold of the consciousness and eating habits of Canadians.

There was no sense of Helen being a junior partner in this marriage. "She was a wealthy woman in her own right," says daughter Rosemary. "Therefore it was important for her to be an independent thinker." In fact, Paul Phelan says his sisters' female-centred leadership is based on Helen's strongly feminist example.

Meanwhile, P.J. was a creative and lateral thinker, who did not fit the mould of the typical Bay Street businessman, says Rosemary, recently divorced and now remarried to another unconventional entrepreneur, Sam Blyth, founder of an adventure-travel business.

"They were a real pair and they lived life to the fullest," says Paul Henderson, a sailing protégé of P.J. Phelan and now president of the International Sailing Federation.

The wealth had humble origins. The Phelans had come out of Waterford, Ireland, and emigrated to Canada in the early 1830s. The original immigrant Thomas Phelan was orphaned when his mother died of cholera in the crossing, and his father was killed in a railway accident before Thomas and his sister even made it to Montreal.

Just like the automobile changed P.J. Phelan's fortunes, the laying of rails underpinned his family's earlier success. Thomas Phelan's grandson, Thomas Patrick (T.P.), started selling newspapers and fruit on the train between Hamilton and Buffalo, N.Y. The family moved to Toronto, where T.P. hawked newspapers such as George Brown's Globe and John Ross Robertson's Telegram.

In 1883, T.P. Phelan and a bunch of cousins incorporated Canada Railway News, capitalized by 2,000 shares -- the same shares that Gail, Rosemary and Holiday consolidated five years ago to take control of the company.

The family moved into food services, setting up lunch bars in railway stations and on the big steamships that plied the Great Lakes. They opened restaurants, including the York Pioneer Restaurant, an institution in Toronto's Union Station.

When Canada's first airport restaurant, the Tea Wing, opened at Montreal's Dorval Airport in 1941, Canada Railway News was invited to manage this experiment. The company had a sideline in providing box lunches to the fledgling Trans Canada Air Lines (later Air Canada), giving it a start in airline catering.

P.J. Phelan grew up handsome and dashing, one of 10 children, a pilot in the Second World War who undertook surveillance flights around the Gulf of Saint Lawrence. Groomed in the family business, he never let the demands of the job detract from his true love, sailing. He chose the detached-owner role, leaving operations to deputies.

Under P.J., the company moved more aggressively into flight kitchens and airline catering, and into restaurants, acquiring such concepts as Harvey's, Swiss Chalet and the late unlamented Steak 'N Burger and Rib O'Beef.

They were golden years, with great Christmas parties on Old Forest Hill Road, P.J. in his slippers greeting guests at the door, and the grandchildren trooping past in bright costumes. There were summers at the cottage on Toronto Island, close to the Royal Canadian Yacht Club, which became a home away from home.

He was a major backer in Canada's efforts to win the prestigious America's Cup, jumping in when the campaign for the 1983 cup started running out of money. Four years later, he took the financial lead on another cup challenge, putting up $14-million.

He had a knack for picking talent, in business or sailing. He got to know a kid who lived on Ward's Island, used to bicycle past his door, and hang out at the yacht club. He mentored the kid, Paul Henderson, who became an Olympic sailor, led an abortive Olympic host-city bid for Toronto, and is now the world's sailing czar.

"P.J. was a leprechaun, with incredible Irish wit and charm. He never took himself seriously even though he was one of the wealthiest men in Canada. Life was joy to him," Mr. Henderson recalls.

But there was a dark side. As the work pressures increased, so did the boozing around the yacht club and in the house. "He was, like many, many people, a functioning alcoholic in his later years," Rosemary Phelan says.

Her brother Paul David argues that P.J.'s alcoholism is exaggerated by his sisters, and besides, his illness is a private matter. P.J.'s yachting friends insist that they never saw him out of control and he never embarrassed them on international sailing trips. "Sure he liked his Myer's Rum, and he was a gregarious character," says Mr. Henderson, who insists that his old friend never made a fool of himself.

Yet one visitor to the house on Old Forest Hill remembers being escorted to the cellar where P.J. proudly displayed his huge cache of Myer's Rum, his favourite tipple. Another sailing acquaintance says that in later years, Cara's boss "was hammered by 11 o'clock every day."

Ms. Regan in her film argues that P.J.'s inability to come to grips with his declining abilities and Cara's succession challenges drove him to immerse himself totally in drinking and sailing. In essence, the boat and the bottle took over.

Alcohol was such a potent fuel in P.J. and Helen's social lives that it couldn't help but touch the children. Sharon Phelan escaped to California to seek a new life far from the burden of the Phelan name. She died in 1994 of a liver disease.

Young Paul David Phelan was a bashful kid who went out sailing with his father but as he got older, gravitated to the solitary Finn dinghies, instead of the Dragons his father preferred. He even sailed one year in the Pan-American Games.

As a young man, Paul David worked as a sous-chef at Cara's Toronto Union Station restaurant, but developed a life of his own, buying Harvey's franchises in Collingwood, Hanover and Owen Sound, Ont. He says he was a pioneer in twinning franchise concepts, putting together Harvey's and Swiss Chalet on the same site -- a concept now emulated by many fast-food purveyors. He sees himself as a pioneer in personal computers, owning one of the early prototypes before they came into style

But when he became a director of Cara in the eighties, he found himself bumping up against his sister Gail, a former academic who become heavily involved in the family holding company.

Gail Regan, intense and bright, had earned a PhD in sociology, raised four kids, and was helping train teachers at the University of Toronto. On the urging of her father, she had gone back for an MBA at York University, and came into the company.

Ms. Regan, who would not be interviewed for this article, is considered an odd duck in Canadian business. Often overpowering in personality, she can exhibit an ethereal intellectualism that is oblivious to others' feelings and impressions. She once said that her IQ was so high that she couldn't possibly stay at home with her four children because it would be too boring. At conferences, she has a tendency to dominate discussions of management or business, putting forward her strongly held views.

Ms. Regan has tried to explore how to be an intellectual and a feminist in the anti-intellectual, chauvinist world of Canadian business -- and she has the resources to pursue this quest.

Some of that money was channelled into the documentary, Proud Waves Break, which expresses her grim take on family and succession. Some consultants find the film disturbing for its unremitting darkness, given that family businesses can be such joyful places.

She has also written The Evil Governor, an electronic 130-page "short story" with a companion 7½-hour audio novel that explores the topic of evil and how governance can play a role in containing it. It may be the most unusual project undertaken by any owner of a major Canadian company.

In her foreword, she writes that she first confronted evil as a baby, living with her parents near an air base while her father flew surveillance missions. She recalls that two of her uncles died in the Second World War.

"I think my parents' isolation, anxiety and grief during my childhood has given me a lifelong sense that something's wrong -- that underneath the ordinariness of everyday life lurks chaos that can break out at any time generating evil."

Ms. Regan also championed an approach to analyzing personality types, called Enneagrams, used as a tool in management recruiting and communication. In Enneagram typology, she sees herself as an Eight -- entrepreneurial, assertive, pushy. She once said her Enneagram implied that she is "hopelessly neurotic and becoming more so. I felt embarrassed about this because it is true. As one of my dear friends said, 'you transition quickly from tycoon to ditz.' "

Inside the company, she was frustrated that her father would not quit, but instead immersed himself in sailing and the bottle. In Ms. Regan's mind, he was not fulfilling his obligation to the company and to her.

"The process was frustrating because I think of myself as bright and talented and committed to the family company," she said in a 2002 interview. "I could have committed to another business or the university.

"I wanted to have meaning to my life, which is why I never stayed home with my kids and I kept taking courses, and going to conferences and gaining skills. For that to be just wasted was to me appalling and bad faith."

Ms. Regan took on big outside projects to satisfy her need for leadership. She got immersed in fundraising for Toronto's downtown Women's College Hospital, and later led the fight to save the hospital from being closed in provincial government cost cutting.

She and husband Tim Regan, a former Cara manager, invested in a high-end real estate brokerage because "I love fine homes." But the Regans experienced health problems, their children weren't willing to take it on, and the firm was sold. Another focus of interest has been Pointe au Baril, a remote, beautiful area of Georgian Bay, where there are several Phelan cottages, including Gail's and Rosemary's places.

Frustrated by the succession logjam, Ms. Regan remembers complaining to her father and her mother: "How can you do this to your child? I'm bright, have done the MBA, the PhD, I had kids and I worked, and you're betraying me . . ."

"Dad knew that he wasn't doing anything [about succession] so he would get acutely depressed," she said. "I feel so sorry for him because I knew he had to let go, he was in over his head, but he wouldn't."

After years of infighting, the situation came to a head in 1995 when P.J.'s health took a dramatic turn for the worse. The history of that period is at the heart of the current dispute, with each side offering its version of events. But one fact was indisputable: P.J. Phelan's 16-year delay on succession had taken its toll.

Helen Gardiner Phelan took over as guardian as her husband declined, but she fell ill from cancer and died in 1999. Issues of P.J.'s guardianship and family ownership became a gold mine for consultants, family counsellors and lawyers.

At one point, Paul David says he believed he would inherit his father's preferred shares, giving him control. But, he says, P.J.'s will was changed in the late 1980s to give the shares' control to a committee of his children and one neutral outsider. Paul David says he could see he would never be able to have the company.

A new shareholders' agreement in 1997 gave him a put on his one-third ownership of the family shares, and in 1998 he exercised it. He says he wanted to cash out of Cara, because he felt its economic prospects looked grim at that time.

Also, "I was politely getting out of my sisters' way." In his view, he was saying: "Okay, girls, if you want to be the big pooh-bahs, I'll get out of the way. They wanted to control the company and I just wanted to ride along."

Now, he says, it's clear that wasn't enough. "They wanted to be in total, absolute control."

For Paul Henderson, these hardened views are depressing. He prefers to remember the charismatic P.J. and Helen, the parties and the gaiety around the yacht club.

But he sees the latest family spat as the culmination of tragic inevitability. "Gail and Paul David are just inherently very bright kids. When you have very bright kids and very bright parents in a business sense, there is going to be conflict."

Will conflict continue in the next generation? Twelve members of what would be the fifth generation of Phelans to own Cara are scattered from Toronto to Sausalito, Los Angeles, and Whistler, B.C., but none works in the business.

Holiday Phelan-Johnson is the first of that generation to step up. She plans to take a more active role in the company, and will soon start apartment-hunting in Toronto. A rich but bitterly divided legacy rests on her slim shoulders.

The Cara stable

Cara Operations Ltd. Is one of Canada's leading integrated restaurant companies with annual sales of about $1.1-billion.

Swiss Chalet

$413-million in sales; 186 restaurants; over 9,500 employees; serves more than 40 million guests a year.

Harvey's

$269-million in system sales; 345 restaurants; nearly 7,000 employees; serves about 50 million a year.

Kelsey's

$207-million in sales; 111 restaurants; over 7,000 employees; serves about 15 million a year.

Montana's

$124-million in sales; 53 restaurants; over 3,600 employees; serves about 10 million a year.

OutBack Steakhouse

$42-million in sales; 16 restaurants; more than 700 employees; serves over 2 million a year.

Second Cup

$174-million in sales; 372 cafes; nearly 4,000 employees; serves close to 80 million a year.

Milestone's Restaurants

$69-million in sales; 22 restaurants; over 1,600 employees; serves approximately four million a year.

Air Terminal Restaurants

$75-million in sales; 98 food, beverage and merchandise concessions; over 1,400 employees serving over 18 million guests a year.

Tickers mentioned in this story

Data UpdateUnchecking box will stop auto data updates

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.